Shares of retailer JD Sports Fashion (LSE: JD) rose by 8% this morning, after the group said that pre-tax profit soared by 81% to £238.34m last year.
Sales rose by 31% to £2.38bn, beating City forecasts of £2.2bn. Adjusted earnings of 19.04p per share were 8% above consensus forecasts of 17.6p per share.
This bumper performance lifted JD’s operating margin from 8.7% to 10.4%. That’s a sizeable increase for a big retailer. It shows how successful JD has been in maximising returns on growing sales of athleisure wear and outdoor gear.
I believe JD’s management deserves a fair amount of respect for what it has achieved. While JD’s shares have risen by 335% in two years, those of rival Sports Direct have fallen by 51%, as profits have slumped.
Is JD still safe to buy?
After today’s gains, JD Sports stock trades on a 2017/18 forecast P/E of 22 with a prospective yield of 0.4%. However, investors hoping for a more generous dividend payout may be disappointed.
Although JD Sports ended last year with net cash of £213.6m after the £112.3m acquisition of Go Outdoors, management plan to keep this cash in the business to fund future growth. The group’s dividend only rose by 4.7% to 1.55p last year, giving a total payout of just over £15m.
Earnings forecasts for 2017/18 may well be upgraded after today’s results. JD’s expansion into Europe and Asia is going well and the group has the potential to continue expanding.
I would hold onto the stock until it becomes clear that the group’s growth is starting to slow. Further gains are certainly possible.
The UK’s top banking buy?
Shares of FTSE 250 lender OneSavings Bank (LSE: OSB) has risen by 140% since its flotation in June 2014. Over the same period, the group’s pre-tax profits have risen from £63.7m to £163.1m.
The OneSavings share price has already risen by 20% in 2017. But the stock still looks affordable relative to its earnings, with a 2017 forecast P/E of 8.7. The bank is expected to pay a total dividend of 12.8p this year, giving a potential yield of 3.15%.
These figures make OneSavings look cheap. But banking stocks are often valued based on their net asset value, also known as book value. OneSavings’ book value is 172p per share. Based on the current share price of 408p, this gives the bank a price/book ratio of 2.4. That’s quite high — I’d normally expect a figure of closer to 1.5.
One reason that OneSavings is valued in this way is that this bank is very profitable. Last year’s net interest margin of 3.14% is around 50% higher than the roughly-2% figures reported by most of the big banks.
A second advantage is that costs are much lower. The bank’s cost-to-income ratio is just 27%. Most of the big banks would be happy if their costs were limited to 50% of their income.
The group’s main business is as a mortgage lender in the buy-to-let market. The loan book seems fairly conservative, with an average loan-to-value ratio of 60%.
Although a housing slowdown might hit profits, the rental market seems likely to grow for the foreseeable future. Further growth seems likely to me. I’d remain a buyer at current levels.
